Currently, lenders generally collect only demographic data, such as an applicant’s race or ethnicity, with mortgage applications, largely because federal law currently places significant restrictions on the collection of this data in other circumstances. The NYDFS rule, along with a similar federal rule that the Consumer Financial Protection Bureau (CFPB) is finalizing that will also require lenders to collect detailed demographic and financial data related to business credit (the section 1071 rule), will therefore require lenders to make substantial operational changes. These rules will also impose significant new compliance obligations and give regulators access to new information that they will likely use to begin conducting more detailed fair reviews of lenders’ business credit programs.
Despite many similarities between the NYDFS rule and the rule in Section 1071, there are several key differences in the proposed rules. Institutions subject to both rules will therefore need to be prepared to implement various operational changes and compliance obligations.
Comments on the NYDFS rule must be submitted by December 12, 2022. The comment period for the Section 1071 rule has ended and the CFPB has agreed to finalize the Section 1071 rule by March 2023. The NYDFS will likely follow a similar schedule for issuing a final rule.
New York Legislature ARC Amendments
Congress passed the Federal CRA, 12 USC § 2901, and following., in 1977. New York enacted a corresponding state CRA, New York Banking Law § 28-b, the following year, and is one of a small number of states that have their own CRA. Both the Federal CRA and the New York CRA require regulators to assess how well banks are meeting the credit needs of all of the communities in which they operate, with a particular focus on people and businesses. low and middle income communities.
The ARC statutes are implemented through detailed regulations. (Federal banking regulators are currently reviewing and modernizing regulations that implement the federal CRA.) Regulators are conducting reviews of banks based on the tests set out in the regulations and rating banks as outstanding, satisfactory, needs improvement or substantial non-compliance. Banks that do not maintain a satisfactory or exceptional CRA rating are subject to significant restrictions on their operations, including restrictions on mergers.
Historically, the New York CRA requirements have mirrored the Federal CRA requirements. However, in 2020, the New York Legislature expanded the scope of the New York CRA to require the NYDFS to specifically assess how NYDFS-regulated banks meet the credit needs of minority-owned businesses and of women when the NYDFS conducts ARC exams. New York banks will now be subject to more extensive CRA assessments than federally chartered banks or chartered banks from other states.
The NYDFS Rule
When it amended the New York ARC in 2020, the New York Legislature did not include a mechanism for NYDFS to collect data to carry out its new statutory mandate to assess bank lending to businesses belonging to minorities and women. NYDFS originally published a Notice of Proposed Rulemaking to collect this data on November 3, 2021. After a public comment period, NYDFS published the current revised proposed rule on October 26, 2022.
The NYDFS rule will apply to New York State chartered banks and FDIC-insured branches of NYDFS-regulated foreign banks that originated at least 25 business credit transactions during each of the two previous calendar years. Banks subject to the NYDFS rule will be required to collect and retain nearly two dozen data points with business credit applications, including date of application and loan decision, action taken, reason of any denial of credit, loan amount and pricing terms, whether the business is minority or female owned, and the race and ethnicity of the principal owners of the business. The NYDFS rule states that the NYDFS will publish a sample data collection form that banks can use to collect this information.
Banks would be required to retain information required by the NYDFS rule for six years. The NYDFS rule as currently drafted would require banks to comply within six months of the issuance of a final rule, with limited exceptions for certain provisions of the rule that would give banks additional time to comply. compliance.
Key Similarities and Differences Between NYDFS Rule and Section 1071 Rule
Section 1071 of the Dodd-Frank Act amended the Equal Credit Opportunity Act (ECOA) to require financial institutions to compile, maintain, and submit to the CFPB certain data on women’s credit applications , minorities and small businesses. In 2011, the CFPB issued an interpretation stating that it would not require compliance with Section 1071 until it issued implementing regulations. The CFPB was eventually sued for enacting late regulations and, as part of the resolution of that litigation, agreed to issue the final rule for Section 1071 by March 2023.
The NYDFS rule and the rule in Section 1071 will be similar in many ways to the federal Home Mortgage Disclosure Act (HMDA), which requires mortgage lenders to collect and report detailed demographic and financial data on mortgage applicants. However, extending these requirements to business credit and applying them to commercial lenders who did not previously have to comply with HMDA requirements will be a step change.
Several aspects of the NYDFS rule and the Section 1071 rule will be similar. For example, New York banks that make at least 25 small business loans in each of the previous two years will generally be subject to both rules. Additionally, the categories of data that lenders will be required to collect as part of loan applications are very similar in both rules. Both rules also prohibit employees or officers involved in determining credit from accessing demographic data that lenders must collect under the rule, but allow an exception where this restriction is not operationally feasible.
In recognition of this overlap, the NYDFS has included in its proposal a provision stating that the NYDFS may, in its discretion, determine that compliance with the rule in Section 1071 constitutes compliance with the NYDFS rule. However, the NYDFS also notes in its proposal that there are key differences between the rules and therefore compliance with the rule in Section 1071 may not be sufficient to comply with the NYDFS rule.
Key differences between the NYDFS rule and the Section 1071 rule include:
- The NYDFS rule will apply to all business credit; the rule in section 1071 will apply only to small business credit, as defined by the rule.
- The rule in Section 1071 will apply to all lenders, including banks and non-banks; the NYDFS rule will only apply to New York State chartered banks and FDIC-insured branches of NYDFS-regulated foreign banks.
- The NYDFS Rule will apply to Covered Banks that make 25 or more commercial loans of any kind in each of the previous two calendar years; the rule in section 1071 will only apply to lenders who make at least 25 small business loans, as defined in the rule, in each of the two preceding calendar years.
- The NYDFS promulgates its rule primarily to assess the performance of banks under the New York CRA; the CFPB promulgates the rule in Section 1071 based on the requirements of the ECOA.
- The Section 1071 rule will require covered lenders to report data to the CFPB annually; although the NYDFS rule allows NYDFS to require banks to report the data they collect, it is likely that NYDFS will primarily collect data from banks on an individual basis as part of ARC reviews .
Preparing for new trade credit data collection requirements
The NYDFS Rule and the Section 1071 Rule are further evidence of an emerging trend among lawmakers and regulators to treat commercial loans, especially smaller dollar commercial loans and small business loans, more like consumer lending, with corresponding operational and compliance challenges for lenders. In another example of this trend, several states have recently adopted new trade credit disclosure requirements that are about to go into effect. Disclosure requirements in California, the first state to adopt these new requirements, will go into effect on December 9, 2022.
Institutions that will be affected by the NYDFS Rule or the Section 1071 Rule, or both, should proactively prepare for implementation and compliance obligations. Institutions should consider identifying covered business credit transactions, reviewing and updating data collection and storage policies and processes, and noting systems and applications that will be impacted and may require updates. Institutions should also seriously consider conducting a full Fair Loans analysis of their business credit portfolio, as regulators will use the data that lenders will now be required to collect from applicants during their Fair Loan reviews of regulated institutions.